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Informist, Tuesday, Sept. 15, 2026

 

By Janwee Prajapati

 

MUMBAI – Overnight indexed swap rates ended sharply higher Tuesday tracking a rise in US Treasury yields and Brent crude oil future prices, dealers said. Further, the announcement of INR 1 trillion worth of bond sales through open market operations to absorb excess liquidity from the banking system also pushed up swap rates, dealers said. However, trade volume was subdued as traders refrained from building aggressive positions ahead of the Federal Open Market Committee's meeting Wednesday, dealers said.

 

The one-year swap rate ended at 6.10%, the highest since Jun. 4 and up seven basis points from 6.03% Friday. The five-year swap rate ended at 6.66%, against 6.57% Friday. Total notional trading volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 536.40 billion Tuesday compared with INR 702.20 billion Friday. The one-year swap hit a high of 6.11%, while the five-year OIS rose to 6.69% during intraday trade. At current levels, the one-year OIS is pricing in four rate hikes, a dealer said.

 

"There is nothing much happening in market today, trade volume is very low," a dealer at a primary dealership said. "Both one- and five-year OIS rates are trading in a narrow range…people (traders) are just squaring their positions."

 

Brent crude oil futures for November delivery were at $106.60 per barrel, up from $104.22 per barrel at the end of Indian trading hours Friday. The rise in Brent crude oil weighed on market sentiment due to fear of escalation in war in West Asia, dealers said. The rise in crude oil paired with a rise in US Treasury yields pulled up swap rates Tuesday, dealers said. The yield on 10-year benchmark US Treasury note was at 5.01%, the highest since 2007, up from 4.95% at 1700 IST Friday due to expectation of a policy rate hike.

 

Bets of an interest rate hike increased after US consumer prices rose 3.4% last month from a year earlier, prompting traders to raise the odds of a Federal Reserve rate hike. The headline inflation figure was unchanged from the prior month and matched estimates from economists polled by The Wall Street Journal. Core CPI, which strips out volatile food and energy costs, rose 2.4%. Both readings reinforced the investor narrative that inflation was still too high for the Fed to keep interest rates on hold.

Fed funds futures are now pricing in a 92.4% probability of a 25-basis-point increase in interest rate at the US Federal Reserve's two-day meeting ending Wednesday, compared with a 59.40% probability a week earlier, according to the CME Group's FedWatch tool.

 

Domestically, India's retail inflation, based on the CPI, rose to a 20-month high in August due to higher food, transport, and restaurant services inflation driven by the impact of the ongoing war in West Asia. The retail inflation was seen broadening in August, according to data released Monday by the statistics ministry. Headline inflation rose to 4.82% on year in August from 4.45% in July, surpassing the Reserve Bank of India's medium-term target of 4% for the third consecutive month. CPI inflation was 2.01% in August last year. The CPI inflation print was broadly in line with economists' expectations. According to an Informist poll, headline inflation was seen at 4.8% in August.

 

Moreover, the Reserve Bank of India announced INR 1 trillion worth of OMO auction Friday in order to absorb excess liquidity from the banking system, which soured market sentiment. The RBI, post-market hours Friday, said it would sell INR 1 trillion of bonds through open-market operations in three tranches, one of INR 500 billion and the remaining two of INR 250 billion, dealers said.

 

Traders had expected the central bank to announce such a measure, as they anticipated the RBI would absorb excess liquidity to facilitate smoother transmission of the rate hike. Some traders expect the RBI to announce another such measure if liquidity in the banking system remains in substantial surplus, dealers said. Some traders said the five-year swap rate could go up to 6.87% if the RBI's Monetary Policy Committee's decides to hike the repo rate.

 

The rise in OIS rates was capped as some domestic players likely received fixed rates at levels seen as attractive, dealers said. Trade volume, however, was subdued as traders await FOMC's decision on policy rate Wednesday, dealers said. Some traders expected the one-year OIS rate to fall all the way to 6% whereas the five-year OIS rate is likely to fall to 6.61% if the FOMC does not hike rate at the FOMC meet Wednesday.

 

"People are waiting for FOMC (decision) tomorrow (Wednesday) so there is no point of building positions today," a dealer at a private sector bank said. "If there is a surprise tomorrow that is if the FOMC do not hike rate then we will see receiving."

 

OUTLOOK

Wednesday, swap rates are seen tracking the movements in US yields and oil prices. Traders will assess. Dealers expect that if the Fed opts for a rate hike in September, the RBI's rate-setting panel will follow suit in October.

Alongside liquidity-draining measures from the RBI such as OMO sales and variable rate reverse repo operations, traders also expect the RBI to conduct dollar-rupee sell-buy swaps both in the primary and secondary markets. 

 

As received bets linked to banks' inflows from foreign currency non-resident (banks) deposits have stopped this week, nearing the end of the deadline Friday to swap dollars under this scheme, swap rates may no longer be capped, dealers said. After the OMO sales announcement, bets that the swap rate curve will flatten would take time to play out have been wiped out as the RBI begins draining liquidity. The one-year swap rate is seen in the range of 5.95-6.15% and the five-year at 6.40-6.70%.

 

	At 1700 IST	FRIDAY
1-year OIS	6.10%	6.03%
2-year OIS	6.34%	6.25%
5-year OIS	6.64%	6.57%
2-year MIFOR	7.56%	7.50%
5-year MIFOR	7.66%	7.60%

 

End

 

US$1 = INR 95.96

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Deepshikha Bhardwaj

 

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